Sunday, November 30, 2008

Charles Krauthammer and George Will are the latest columnists to discuss the economic agenda of the incoming Obama administration. George Will's column is titled New New Deal Won't Help the Economy

Early in what became the Great Depression, John Maynard Keynes was asked if anything similar had ever happened. "Yes," he replied, "it was called the Dark Ages and it lasted 400 years." It did take 25 years, until November 1954, for the Dow to return to the peak it reached in September 1929. So caution is sensible concerning calls for a new New Deal.

The assumption is that the New Deal vanquished the Depression. Intelligent, informed people differ about why the Depression lasted so long. But people whose recipe for recovery today is another New Deal should remember that America's biggest industrial collapse occurred in 1937, eight years after the 1929 stock market crash and nearly five years into the New Deal. In 1939, after a decade of frantic federal spending -- President Herbert Hoover increased it more than 50 percent between 1929 and the inauguration of Franklin Roosevelt -- unemployment was 17.2 percent.

Even more egregious will be the directives to a nationalized Detroit. Sen. Charles Schumer, the noted automotive engineer, declared "unacceptable" last week "a business model based on gas." Instead, "We need a business model based on cars of the future, and we already know what that future is: the plug-in hybrid electric car."

The Chevy Volt, for example? It has huge remaining technological hurdles, gets 40 miles on a charge and will sell for about $40,000, necessitating a $7,500 outright government subsidy. Who but the rich and politically correct will choose that over a $12,000 gas-powered Hyundai? The new Detroit churning out Schumer-mobiles will make the steel mills of the Soviet Union look the model of efficiency.

The ruling Democrats have a choice: Rescue this economy to return it to market control. Or use this crisis to seize the commanding heights of the economy for the greater social good. Note: The latter has already been tried. The results are filed under "History, ash heap of."

Amity Shlaes responds to Krugman's accusation and discussion the Great Depression and President-Elect Obama's economic policies in a column titled The Krugman Recipe for Depression: Massive government spending is no solution to unemployment

.....Mr. Krugman has mentioned me by name. He recently said that I am the one "whose misleading statistics have been widely disseminated on the right."

Mr. Krugman is a new Nobel Laureate, teaches at Princeton University and writes a column for a nationally prominent newspaper. So what he says is believed to be objective by many people, even when it isn't. But the larger reason we should care about the 1930s employment record is that the cure Roosevelt offered, the New Deal, is on everyone else's mind as well. In a recent "60 Minutes" interview, President-elect Barack Obama said, "keep in mind that 1932, 1933, the unemployment rate was 25%, inching up to 30%."

The New Deal is Mr. Obama's context for the giant infrastructure plan his new team is developing. If he proposes FDR-style recovery programs, then it is useful to establish whether those original programs actually brought recovery. The answer is, they didn't. New Deal spending provided jobs but did not get the country back to where it was before.

This reality shows most clearly in the data -- everyone's data. During the Depression the federal government did not survey unemployment routinely as it does today. But a young economist named Stanley Lebergott helped the Bureau of Labor Statistics in Washington compile systematic unemployment data for that key period. He counted up what he called "regular work" such as a job as a school teacher or a job in the private sector. He intentionally did not include temporary jobs in emergency programs -- because to count a short-term, make-work project as a real job was to mask the anxiety of one who really didn't have regular work with long-term prospects.

The result is what we today call the Lebergott/Bureau of Labor Statistics series. They show one man in four was unemployed when Roosevelt took office. They show joblessness overall always above the 14% line from 1931 to 1940. Six years into the New Deal and its programs to create jobs or help organized labor, two in 10 men were unemployed. Mr. Lebergott went on to become one of America's premier economic historians at Wesleyan University. His data are what I cite. So do others, including our president-elect in the "60 Minutes" interview.

The column is worth reading in its entirety because debates such as this once between Krugman and Shlaes are certain to reappear often in the coming months, as debate over Obama's "New, New Deal" begin.

Saturday, November 22, 2008

A recent Wall Street Journal editorial describes the problems New York City has faced over the last 50 years and explains why it has lost jobs to other locations. The editoral it titled New York Is Headed for Dark Days Unless Bloomberg Changes Course by Nicole Gelinas and it represents a warning to President Elect Obama.

Last week, Mayor Mike Bloomberg announced a grim update to New York City's $60 billion budget. To meet falling revenues he proposes spending cuts and property-tax hikes, and he may increase income taxes by 15%.

The challenges New York City faces are more significant than those facing other large cities.

To understand just how dependent upon Wall Street New York City's budget has become, consider these facts. Two years ago, a third of all the wages and income in the city came from the finance, insurance and real-estate industries, up from just a quarter a decade earlier. The securities industry alone was responsible for a quarter of wages, up from 17% from a decade earlier.

The city also depends on its top 1% of earners -- many of them tied to the financial industry -- for nearly half of its personal-income tax revenue, up from 41% from last decade. The financial sector provides more than a third of business taxes. Last year, Wall Street bonuses alone comprised 8% of the city's personal income. In 2000, the peak year for tech-bubble bonuses, they comprised 6.6%.

Wall Street's boom, moreover, papered over the precarious structure of New York City's budget. Two years ago, New York took in 41% more in tax revenues than it had in 2000, after inflation. But the city's long-term, big-ticket budget items -- pensions and health care for city workers, Medicaid and debt costs -- had increased by more than half.

The mayor calls these costs "uncontrollable" because cutting them requires long-term planning. They now comprise more than half of the budget funded by city tax revenues, and will continue to grow if left unchecked. The budget in general is 22% bigger, after adjusting for population and inflation, than it was at the height of the 1970s fiscal crisis. Most of that growth came in the past seven years.

For the United States to recover quickly from its current economic problems, the federal government must make it less expensive to invest in the United States. The Democrats' Union Card Check proposal and their desire to raise taxes are moves in the wrong direction.